Romania's strong economic growth not reflected in budget revenue: watchdog

BUCHAREST (Reuters) - Romania’s fiscal deficit is still likely to overshoot the European Union’s ceiling this year as stellar economic growth in the first quarter was not reflected in budget revenues, the head of the country’s independent fiscal watchdog said.

Romania was the EU’s fastest-growing economy in January-March, expanding 5.7 percent from a year earlier likely due to a consumption boom fueled by wage hikes and tax cuts.

“It is something of a puzzle why at such a high economic growth rate, value-added tax collection was disappointing and the corporate profit tax fell in nominal terms,” the head of Romania’s Fiscal Council, Ionut Dumitru, said on Monday.

He was speaking during an interview for the Reuters Central & Eastern Europe Investment Summit, conducted at his office at Raiffeisen Bank Romania, where he is chief economist.

Romania reported a slight budget surplus at the end of the first quarter, but both the Council and the European Commission expect Romania to overshoot the bloc’s deficit ceiling of 3 percent of gross domestic product for the full year.

With more tax cuts and public sector wage hikes in the pipeline, the European Commission said this month it expected Romania to run the EU’s largest deficits this year and next at 3.5 percent and 3.7 percent of GDP, respectively.

On Monday, Brussels warned Romania it needed to correct its fiscal ways to avoid triggering an excessive deficit procedure, which would hurt its markets and credit ratings.

Meanwhile, Romanian lawmakers were gearing up to approve a multi-year single wage bill for the public sector that would more than double healthcare workers’ wages, boost education pay by 50 percent and other public salaries by lower double digits.

Dumitru said the bill will boost overall public sector wage costs to an estimated 12 percent of GDP by 2022, from 8 percent at present.

“That is a very fast rise of the public sector wage bill that would raise sustainability questions,” he said.

“This law is needed to reintroduce equity in the public sector, where there are fairly large salary discrepancies. But Romania is now confronting a labor force crisis. The pressure on private businesses will grow as salaries are already higher in the public sector.”

Romania’s gross monthly average wage is a little over 700 euros ($786), compared with the EU average of 2,370 euros.

The European Commission estimates the country will collect tax revenue worth 25.4 percent of GDP this year, sharply below the EU average of 40 percent.

Romania spends just under 20 percent of GDP on state wages, pensions and social assistance, leaving little for investment, in a country where 40 percent of roads are made of gravel and hospitals are decades old. Public investment was down roughly 60 percent on the year in the first quarter.

Further complicating the fiscal outlook is a government plan to overhaul taxation from 2018, replacing a flat wage tax of 16 percent with lower differentiated levies on household income and introducing a slew of deductions.

The change is still under discussion at the finance ministry, and Dumitru said it was impossible to assess the draft bill’s budget cost without further details.

“I think it is premature to think we can enforce in 2018 a system that still has so many question marks and that we are not equipped to handle technically.”

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Editing by Susan Fenton